Sustainability and Inclusiveness Primer: Doing Good through Strategic Philanthropy

Chinese companies that are serious about philanthropy are doing more than writing checks. Strategic investments are making an impact on society in ways traditional philanthropy never could

Giving to a worthy cause used to be as simple as signing a check and mailing it to a charity. As the idea of philanthropy continues to gain traction, buzzwords such as ‘impact investing’, ‘venture philanthropy’, ‘social venture capital’ etc., have emerged. All of these belong to a broader umbrella concept called ‘strategic philanthropy’ and these terms are often used interchangeably.

So what really is ‘strategic philanthropy’ all about?

In essence, strategic philanthropy refers to a new wave of philanthropy that mirrors successful business models to address social and environmental challenges worldwide. It focuses on achieving outcomes, embracing innovation and taking risks.

Wealthy and sophisticated Asian investors are now becoming more strategic and are incorporating philanthropy into their wealth management plans. The region is seeing substantial growth in professional and institutionalized philanthropy foundations. China especially has seen an almost 40% increase in such foundations from 2008 to 2011: from 643 in 2008 to about 900 in 2011 as per Singapore’s Business Times.

According to a report by the Credit Suisse Research Institute, the wealthiest individuals in Asia give around 12% of their total assets compared to 8% both in the US and Middle East. A regional corporate social responsibility think-tank estimates that there were at least 875,000 US dollar millionaires in China in 2010. As China’s wealth has grown, so has the level of philanthropic investment. The Chinese government is also increasingly seeing philanthropy’s potential to contribute to society and is considering joining hands with private philanthropists to cope with the growing social and environmental concerns that are a result of China’s rapid development.

Counting on homegrown philanthropists is usually better than relying on philanthropists from outside. They are in a better position to drive social change in their home countries, inspired by domestic values beliefs and cultures. Alibaba group founder Jack Ma is one of the most successful strategic philanthropists in China. Through various initiatives related to the Alibaba Group, Jack Ma supports small and medium enterprises (SMEs) in China in the hope of bringing lasting change.

Ma believes that apart from striving for long-term profitability, a company should focus on serving its customers well and taking good care of its employees. He also believes in unleashing the potential of every entrepreneur and creating thousands of jobs for everyone in China to achieve sustainable and inclusive development.

The company handholds young enterprises as they begin their journey. Among other things, it provides business management software, internet infrastructure services, and educational services to nurture enterprise management and e-commerce professionals. His website also seeks to support SMEs largely ignored by big financial and credit institutions. Ma has even gone out of way to help SMEs. When the financial tsunami of 2008 was on the horizon, the company reduced its subscriber fees of its China Gold Supplier membership program by 60% so that more SMEs could sign up. Ma took this daring step despite worries over Alibaba’s falling profit margins.

Here is a snapshot of what Ma has done to realize his vision of helping SMEs and other worthy causes in China and beyond:

In 2007 Ma launched Ali-Loan, a small business loan assistance program, by partnering with leading banks in China

The Alibaba Group in collaboration with the Grameen Trust of Bangladesh formed a micro-lending institution called Grameen China in September 2009:

The initial focus was on making loans of approximately $400 per person to more than 8,000 people in Sichuan and Inner Mongolia

Modeled on Grameen Bank’s microfinance model, Grameen China is being built and managed by Grameen Trust and has an initial funding of $5 million from his group

Alibaba is advising start-ups and young enterprises on technology-based support to help potential recipients access the program and eventually build their businesses online

Alibaba announced the creation of China’s first Small Business Credit Rating System and established a $147 million Business Integrity Insurance Fund in 2010

With support from Ma and other strategic philanthropists from China, the China Global Conservation Fund was established by The Nature Conservancy in 2012. It aims to generate meaningful environmental and social returns by giving support to exceptional conservation projects globally

After he stepped down as the Chairman and CEO of Alibaba Group, he became the non-paid Chairman of The Nature Conservancy’s China Board of Trustees in May 2013

While traditional philanthropy often focuses on the inputs, strategic philanthropy focuses on long-lasting impact. In many cases, it builds on the entrepreneurial tradition of creating value and the understanding that a business approach focused on return on investments, may it be financial, environmental or social, is more lasting. If strategic philanthropy is done correctly, it will create meaning and social value for the investor (giver) and the investee (recipient).

Accordingly, referring to the above examples and some of the other conventional practices on strategic philanthropy, I would like to suggest the following key ideas for making philanthropic investment in China or the region more strategically:

Find shared goals – Instead of rushing in to make a financial commitment, the strategic philanthropist needs to take time to understand the needs of the cause. This time is best spent at the frontlines to understand the issues in-depth and evaluate the organization’s business and financing model, its market and competition, public relations, sales strategy, and the quality of management.

Strong governance – it is necessary to be transparent and accountable during the course of action in order to attain a long-lasting outcome. Nonetheless, while being accountable, the strategic philanthropist should not dictate terms and intervene with the daily operations of the organization. He or she must treat the organizational staff as a valuable asset rather than his or her own personal servants.

Focus on SROIs and EROIs – Philanthropy recipients are organizations with a high growth potential or a proven growth rate. The strategic philanthropist seeks to maximize social and/or environmental return on investments (SROIs and EROIs).

Connect with core business – The recipient is always an enterprise or an organization with a core business. This is a big deviation from the traditional focus of donation and charity, which is usually specific to a project or a program.

Identify and allocate resources – Financing models are chosen to suit the organization and its ultimate goals. Strategic philanthropy funds experiment with different models that best suit the environment of enterprises in emerging markets.

Plan long-term – A longer-term commitment of usually three to seven years is common to allow the organization to fulfill its goals of growth and maturity. At the beginning of the investment period, the appropriate exit scheme is already considered, planned for, and agreed upon by both parties.

Get involved – Financial investment is supplemented with management support and capacity building. Strategic philanthropists or their employees often have a seat on the organization’s board or act as mentors to the organization or entrepreneur.

Measure the impact – Ongoing monitoring and performance measurement is important. The strategic philanthropist will be engaged in all stages of growth and must be kept abreast of the progress.

Giving back to the society is an important way to help maintain cohesiveness especially in the face of rising social and environmental challenges. At the same time, strategic philanthropy must move from output (how much is given and how much is received) to outcomes (actual social change results from that giving). One-way philanthropy, that is deeply rooted in the traditional Chinese culture to “return to the society and contribute to the homeland”, may not be seen as effective anymore as compared to a mutually beneficial strategic philanthropy. There are still many challenges facing Chinese philanthropy and its approach is regarded as ineffective in motivating individuals or companies to carry out philanthropy. More importantly, referring to the international social responsibility guidelines outlined in the ISO 26000 on Socially Responsibility, philanthropy is one of the many aspects that can make a company socially responsible. Only by doing philanthropy strategically can a philanthropist elevate social responsibility or CSR to a higher and more sophisticated level.

Thank you for sharing your article. Certainly, strategic philanthropy is gaining increasing currency in both academic literature and in reality. Donors are encouraged to embrace complexity and avoid simplicity. I think the problem is how to measure “outcome” or “impact”, especially for “softwares” such as service delivery and community support. These are more challenging to “measure” than say, how many buildings one has donated, how many desks were provided to kids, and so on. In my own experience, I’ve also come across some unfortunate waste of donated resources (i.e. donors donating a huge building intended for teaching, but the building is left to wrought because there are no teachers and kids nearby to use it!!).

Ideally, the ultimate result I would like to see is for countries to develop national rating systems to foundations, NGOs, and so on that will enable donors to see their impact factors (in the long-run!) and so on. But of course these NGOs/ foundations will be reluctant to be rated (it’s really a very principal-agent theory here.).

I came across an example the other day about how they’re changing the ways to measure “impact” and “outcome” for an NGO in Australia that helps young people get back to their feet through employment. You can take a look at it. Also read another article about impact investing too!

Anyway, I hope CSR will be caught on by businesses across China, but that won’t make a difference until the general public will consciously choose products from companies that are more ethical.

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